Better times ahead for India’s venture capital market

The last 18-odd months, especially January onwards, haven’t been the best for India’s start-up market. As early stage investors consolidate existing portfolios, the lull in investments, particularly in the critical Series A stage, continues to hurt young start-ups. So far, according to data compiled by Chennai-based researcher Venture Intelligence, about $500 million has been clocked in venture capital investments across 127 deals. Last year, when the funding slowdown started to intensify, $1.5 billion was invested across 450 deals against more than $2 billion across 528 deals in the previous year. However, the past 18-odd months have also been eventful in terms of some broad shifts within the venture capital industry itself. A quick look at those shifts and what they may mean for the start-up market ahead.

1. It is fairly common in the venture capital industry globally for seasoned fund managers to leave established firms and strike out on their own. In India, it is less common, chiefly because the industry itself is barely a decade old. But, that has started to change. Former Helion Venture Partners fund managers Rahul Chowdhri, Alok Goyal and Ritesh Banglani quit to start Stellaris Venture Partners last year. SAIF Partners fund managers Rohit Jain and Mukul Singhal also broke away to start Pravega Ventures around the same time. In May, Mint reported that Rahul Chandra, one of Helion’s founding partners, is starting up on his own with a new $100 million fund called Unitary Helion. All these firms aim to invest in early-stage start-ups, at the seed and Series A stages, primarily in the technology sector. Most of the larger firms have vacated that space over the past 18 months and the new firms think they have an uncontested opportunity to catch the next generation of start-ups early.

2. Seasoned fund managers aren’t the only ones staking out that opportunity. A large contingent of angel investors and successful entrepreneurs are now moving to the next level with their own venture capital firms. There’s Pi Ventures, whose co-founder Manish Singhal is best known for co-founding online angel investment platform LetsVenture.

Then, there’s Ideaspring Capital, co-founded by technology entrepreneur Naganand Doraswamy; Equanimity Investments, founded by angel investor and former Franklin Templeton Investments executive Rajesh Sehgal; and Unicorn India Ventures, which was started by former Mumbai Angels president Anil Joshi and entrepreneur and angel investor Bhaskar Majumdar. Most of the fund managers in this group have either built companies themselves or have extensive operating experience across the corporate sector. Given their backgrounds, they are likely to be far more hands-on as investors than venture capital fund managers in the past.

3. One of the key developments in India’s start-up market over the past decade has been the development of a large, robust angel investor ecosystem. Lately, the ecosystem has undergone some changes. Chiefly, legacy organized angel investor networks, which dominated investing activity in the earlier half of the decade, have had to cede ground to so-called super angels—high-net-worth individuals such as Google’s Rajan Anandan or Tata Sons chairman emeritus Ratan Tata—or online platforms that employ crowdfunding practices like Letsventure. So, it isn’t surprising that these angel networks are now turning into venture capital funds. This April, Indian Angel Network (IAN), the country’s largest legacy organised angel investor network, announced the first close of its $55 million debut fund and will invest in concert with IAN. Networks such as IAN represent a substantial capital pool because of their larger member base and adding separate funds to the mix will bring more money into the system.

4. Finally, established venture capital firms are also looking at newer ways to approach the next phase of early-stage investing here. Last week, Mint reported that Inventus Capital Partners, the Bengaluru-based venture capital firm that counts Silicon Valley angel investor and serial entrepreneur Kanwal Rekhi as a founder, is in the process of raising a separate India-focused fund. The proposed fund is a big shift in strategy for the firm that has until now invested both in India and the US from a common fund. A separate India fund signals that Inventus, which is focused on the technology sector, sees enough depth in the local technology start-up market, despite recent ups and downs, to focus more sharply on India. IDG Ventures India, also a Bengaluru-based venture capital firm that has backed companies such as Myntra and Perfint, recently teamed up with Unilever’s venture capital arm Unilever Ventures and Amazon Web Services to jointly invest anywhere between $500,000 and $5 million in local start-ups. Earlier, the firm had also partnered with accelerator Axilor Ventures to back start-ups and the seed and pre-Series A stages.

The initiatives enable the firm to get a headstart on start-ups that may be ready for Series A funding a couple of years later. Its Bengaluru-based peer Kalaari Capital is trying to do the same through its incubator programme Kstart, while Matrix Partners India in Mumbai runs an outreach programme through co-working and networking spaces. While most of these firms have moved away from seed-stage investing and slowed down on Series A in the last 18 months, such start-ups continue to be on their radar. The early-stage investment slowdown will most likely last a few more quarters before investors return to the market. But, clearly, while the downturn plays out, preparations are already underway for the next phase of investing.

Even when the next phase gets going in right earnest, it may be a while before the investment activity gets to the exuberant levels of the later half of 2014 and 2015. Given how many more venture capital firms are going to be out there soon, that may not be such as a bad thing.